Best High Yield Savings Accounts – How To Choose and Use – Info Money Manage

Interest rates today aren’t great, but if you have savings at a local bank paying less than 0.25 percent interest (and most are), you best look elsewhere. Online high yield savings accounts offer up to 10 times the average interest rate because they don’t have to maintain physical branches. Here are today’s best online savings rates:

High yield savings accounts are online only accounts that typically pay between 5 – 10 times the interest offered by the savings accounts at your local branch. These days, that’s not saying much, but 0.90 percent still beats 0.09 percent.

While rates on today’s high yield savings accounts won’t secure your retirement, these accounts are still the best place to put cash you might need in a pinch or for a goal in the next couple years. That’s because they’re liquid—you can withdraw cash anytime—and they’re FDIC insured up to $250,000.

High yield savings accounts compared

Choosing a high yield savings account isn’t rocket science—although you do need to watch out for banks that advertise higher rates but come with a catch, like minimum balances or a teaser rate that drops after a few months.

The banks we feature here have no minimum balance, no monthly or low balance fees, and the advertised rates are permanent. Their rates differ slightly, but they’re otherwise similar: All offer 24/7 customer service and electronic transfers within a couple of days.

About high yield savings accounts

High yield savings accounts are very simple savings accounts; the only difference between these accounts and the savings accounts offered at your local bank branch is that online only savings accounts can pay substantially higher interest rates because they don’t have to support the infrastructure of physical branches.

Wait. An online only bank? How does that work?

Chances are you have a checking and/or savings account at a bank that has a few—or maybe lots—of branch buildings in your area. But think about it: when’s the last time you visited one? More than likely, you already do most of your banking online, on your phone, and via ATMs.

Online savings accounts simply take the teller out of the banking equation. You open your account online (or by phone) and fund your account either by an electronic transfer from your existing bank or by mailing a check. Once your account is open, you can transfer money to and from your other bank accounts electronically, mail checks to deposit or withdraw cash at an ATM (with certain accounts).

About 99 percent of the time, you won’t ever miss a branch. And the payoff is more interest.

How to use high yield savings accounts

We recommend that everybody have at least one high yield savings accounts for saving money for your emergency fund—at least six months of monthly living expenses—that you can access immediately if you get sick, lose your income, or face a large unexpected expense.

We also think these savings accounts are great places for saving for short-term goals when you don’t want to risk losing money with higher risk investments. For example, if you’re saving money to buy a new car or for your wedding in the next couple of years, you may be able to get a higher rate of return by investing in a mutual fund or other securities, but in such a short period of time, you may also lose money. Investments are best for savings goals more than a few years away; otherwise, savings accounts are safer.

Pros of online savings accounts

You earn more interest

These accounts are called “high yield” for a reason. You can earn up to 10 times more interest through an online savings account than you can with a traditional bank. Online banks don’t face as many operating costs as other banks, and they pass on the savings to account holders.

For instance, a brick-and-mortar bank may offer an interest rate between 0.01-0.05 percent on a savings account. The online savings account from Ally offers a one percent interest rate. That’s a significant jump.

To estimate how much you’ll actually be earning in interest, you can calculate the account’s Annual Percentage Yield or APY. An account’s APY shows how much your savings account grows each year in compound interest, not just simple interest. A $1,000 savings deposit at a 1 percent interest rate earns you $10 in simple interest over a year. If the rate’s compounded daily, however, you’ll earn $10.05 a year. This may not sound like much of a bonus. But the more you deposit, the longer you keep the account, and the better your interest rate is, the more the savings add up.

As a bonus, online banks may charge lower rates for mortgages and loans.

One savings account offering among the highest interest rates is Discover, which comes with a 1.75 percent APY. As a bonus, there’s no minimum balance and no monthly fee. Your interest is compounded daily so you’re earning as much as possible.

Learn more: Open a Discover Online Savings Account now

Your account has FDIC insurance

Online accounts are likely to come with FDIC insurance, a must for any savings account.

Banks offering FDIC insurance are members of the Federal Deposit Insurance Corporation (or FDIC). The insurance is a protection plan covering your deposits in case the bank goes out of business. Most FDIC plans will insure up to $250,000.

We wouldn’t endorse a non-FDIC insured account, but we want to make a special note of HSBC’s Direct Online Savings Account. It’s insured, it returns at a high interest rate, and it has no monthly maintenance fees.

Learn more: Open an HSBC Online Savings Account now

You can bank anytime and anywhere

Online banks work around your schedule. You can make deposits, transfer money, pay bills, and see your account activity at any time as long as you have Internet access.

Convenience extends to bank statements and account-related paperwork—you can access those services online too. If you’re moving, or if you don’t live close to any brick-and-mortar banks, it’s still easy to monitor your savings account.

Online banks offer unique services

To make up for the absence of physical branches, online banks work around the clock. You can get your savings account balance at three in the morning if necessary. Customer service (often around the clock as well) is available by phone. As technology develops, online banks adapt accordingly, so you’ll be able to get account services from any phone or mobile device.

Other tools at an online bank’s website may include budgeting and loan calculators, investment analysis, tax preparation, and more low-cost or free services.

You can sync your savings account to other banks

You’re able to transfer money between an online savings account and another account via regular or one-time direct deposits.

You can also withdraw funds if necessary. High-yield online savings accounts are liquid, which means you can take out money at any time—for instance, if you need to access funds while traveling.

Cons of online savings accounts

You don’t get in-person customer services

Though you can talk to customer service representatives over the phone and through online chat, you can’t meet them face to face. If you prefer in-person communication to answer a question, resolve a problem, or discuss your options, you might want to pick a bank with a brick-and-mortar branch.

Some bank account holders, such as those with business accounts, value a personal relationship with their bank. This relationship can come in handy when it’s time to take out a loan or apply for a mortgage. And it’s much easier to cultivate in person.

Additionally, with an online account you’re placing lots of trust in the Internet. Websites do occasionally go down because of maintenance or unexpected technical issues. If this happens you might temporarily lose access to your account.

Deposits take time

You can add money to your online savings account from other sources. But some online account holders report the process is complicated, especially if you plan to deposit cash.

If you’re depositing a check, the bank may have an application where you can take a picture of the check. Or you can deposit the check in another account and transfer the funds. Cash is trickier. You might have to transfer the cash through a money order or find an ATM that accepts your deposits. For regular cash deposits, a brick-and-mortar bank could be the more practical choice.

Fund transfers may be slow

Expect to wait three-to-five days if you’re transferring money from your online savings account to another bank. If you need the money more quickly, you may have to get it from another account. The best option is to plan ahead if you know you’ll need to withdraw from online savings. Assume a five-day wait.

There’s a risk of security compromise

Whenever you open an online bank account, you should take steps to maximize your personal security. Online banks have encryption software and FDIC protection to keep your information as safe as possible. But you still run the risk of fraud, identity theft, and malware.

Make sure your provider employs protections just in case. For instance, online banks should alert you immediately to any sign of a security breach. And if you’re depositing or withdrawing checks, the bank can make copies of the cleared checks available online.

High yield savings accounts vs Certificates of Deposit (CDs)

A certificate of deposit offers a higher interest rate; shouldn’t I open a CD instead of a savings account?

With a CD, you must leave your money deposited for the entire term (for example, 18 months or five years) to earn the advertised interest rate. If you withdraw any of the money early, you forfeit some of the interest earned, which may result in a lower actual yield than what you would earn in a savings account.

Because we typically have fewer assets when we’re young and have more unexpected expenses pop up, we recommend sticking with a savings account until you have a few months of living expenses saved. At that point, a CD may make sense to get a higher interest rate as you save for a goal that’s a year or more in the future. Compare the best CD rates here.

Money Under 30 has everything you need to know about money, written by real people who’ve been there. Enter your email to receive our free weekly newsletter and MoneySchool, our free 7-day course that will help you make immediate progress on whatever money challenge you’re facing right now.